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China's Unprecedented Demographic Problem Takes Shape

Chinese society is on the verge of a structural transformation even more profound than the long and painful project of economic rebalancing, which the Communist Party is anxiously beginning to undertake. As we recently discussed, Stratfor warnsChina's population is aging more rapidly than it is getting rich, giving rise to a great demographic imbalance with important implications for the Party's efforts to transform the Chinese economy and preserve its own power in the coming decade. In fact, as BofAML notes, China's working-age population peaked last year (3 years ahead of demographers' schedule) representing a major turning point for the world's economy.

Via BofAML,

China’s working age population peaked last year, shrinking by 3.45 million (or -0.6% year-on-year), according to the National Bureau of Statistics, to 937.27 million.1 That represents a major demographic turning point, not just for China, but also for Asia and the world. The turning point has come three years ahead of schedule, as most demographers had put China’s peak at 2015.

China’s demographic peak has raised questions about what this implies for Asia, and how the rest of Asia stands in terms of their demographic peaks and profiles. China’s demographic peak marks the end of a major mobilization of China’s labor surplus into the global economy over the last three decades. And just as China’s entry into the global economy shook the world in terms of its sheer labor pool size, the reversal may be just as ground-shaking.

Over the last three decades, global manufacturing production networks have shifted to China. The off-shoring of the manufacturing chain to China has contained production costs and domestic labor wages. China was credited for exporting deflation to the rest of the world, because of its horizontal labor supply curve (which not too long ago seemed infinite). China’s labor supply curve has however turned increasingly steeper in the recent decade, with wage pressures and labor shortages already apparent. China’s labor supply curve looks set to turn even steeper in the coming years.

Which other Asian countries will be next in terms of “demographic peaks” for their working-age population?

Peaks of the working-age population (rather than overall population) corresponds more closely to labor force, and will matter more in terms of its impact on potential GDP growth, consumer spending or property demand.

Two reports in Chinese media highlight different aspects of China's unfolding demographic crunch.

The Ministry of Education reported Aug. 21 that more than 13,600 primary schools closed nationwide in 2012. The ministry looked to China's dramatically shifting demographic profile to explain the widespread closures, noting that between 2011 and 2012 the number of students in primary and secondary schools fell from nearly 150 million to 145 million. It also confirmed that between 2002 and 2012, the number of students enrolled in primary schools dropped by nearly 20 percent. The ministry's report comes one day after an article in People's Daily, the government newspaper, warned of China's impending social security crisis as the number of elderly is expected to rise from 194 million in 2012 to 300 million by 2025.

The Communist Party is already considering measures to counter, or at least limit the short-term impact of, demographic changes in Chinese society. On one hand, the Party continues to flirt with relaxing the one-child policy in an effort to boost fertility rates, most recently with a potential pilot program in Shanghai that would allow only-child couples to have another child. On the other hand, the government has proposed raising the national retirement age from 55 to 60 for women and from 60 to 65 for men. If implemented, this would bring China's retirement policy more in line with international norms and delay some of the financial and other social pressures created by the ballooning number of retirees dependent on government pensions and the care of their children.

But even sweeping adjustments to the one-child policy or the national retirement age would create only temporary and partial buffers to the problem of demographic change. It is no longer clear that the one-child policy has any appreciable impact on population growth in China. China's low fertility rate (1.4 children per mother, compared with an average of 1.7 in developed countries and 2.0 in the United States) is at least as much a reflection of urban couples' struggles to cope with the rapidly rising cost of living and education in many Chinese cities as it is of draconian enforcement of the policy.

Likewise, lifting the retirement age by five years will only partly delay the inevitable, and in the meantime it will meet stiff opposition from an important constituency of professionals, including many civil servants. In adjusting the retirement age, the government also risks aggravating an employment crisis among the rapidly growing population of unemployed college graduates in cities, many of whom are looking to filter into the employment ladder as elderly workers exit the workforce. In this context, the Communist Party must weigh policy adjustments carefully -- any change it makes in one area is likely to create new tensions elsewhere in the workforce.

The crux of China's demographic challenge lies in the fact that, unlike Japan, South Korea, the United States and Western European countries, China's population will grow old before the majority of it is anywhere near middle-income status, let alone rich. This is historically unprecedented, and its implications are made all the more unpredictable by its coinciding with the Chinese economy's forced shift away from an economic model grounded in the exploitation of inexhaustibly cheap labor toward one in which young Chinese will be expected to sustain the country's economic life as workers and as consumers. A temporary reprieve from the demographic crisis will be difficult but possible with reform, but a long-term solution is far out of reach.